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Wednesday, 18 April 2012

Rate cut hope as RBI melts - Home and auto loans set for relief

Rate cut hope as RBI melts

- Home and auto loans set for relief

OUR SPECIAL CORRESPONDENT

Mumbai, April 17: Home and auto loan borrowers and companies are salivating at the prospect of a cut in lending rates as banks prepare to go into a deep huddle later this week to discuss the implications of India's first interest rate slash in three years.

The RBI today stunned the markets with an unexpectedly sharp 50 basis point cut in the repo rate — the sole rate-signalling device in the central bank's armoury —which was trimmed to 8 per cent.

The rate cut is the first clear indication that the RBI is ready to make a break with the hawkish monetary policy it has relentlessly pursued for over three years. Between March 2010 and October 2011, the RBI raised rates 13 times as it struggled to put a lid on inflation.

However, RBI governor Duvvuri Subbarao warned that the scope for further rate cuts was limited this year because inflation was ruling well above tolerance limits and projected at 6.5 per cent by the end of March next year.

The central bank has been under pressure to trim rates and re-ignite a stuttering economy, which has seen its GDP growth slow to 6.9 per cent in the year ended March 31.

The aggressive rate cut has been welcomed by industry that has been battling the twin demons of weak demand and rising input costs all through last year.

The RBI expects the Indian economy to grow at 7.3 per cent this fiscal and indicated that the return to the heady days of over 9 per cent growth, before the outbreak of the Lehman crisis in September 2008, was no longer possible.

Senior bankers said they would pass on the benefits of the repo rate cut to their customers after assessing how it would impact their borrowing costs.

Home, car and corporate loans are now benchmarked against a Base Rate, which varies for each bank and depends on its cost of funds and operating expenses. Currently, the base rates of banks range from 10 to 12 per cent.

"Will interest rates come down? Definitely they will come down, but probably not tomorrow. Both lending and deposit rates will come down. But this will take a while as the base rate is a function of cost. We will wait for the costs to come down," Aditya Puri, the managing director of HDFC Bank, told reporters here.

Pratip Chaudhuri, the chairman of SBI, said the benefits of the rate cut would be passed after the bank's asset-liability committee had reviewed the situation. But he indicated that it might not be across-the-board cuts with the country's largest bank opting to offer the biggest cuts in those segments that offer the best margins.

"In our case, the big beneficiaries would be small and medium enterprises (SMEs). Our asset-liability committee is due to meet later today and it will soon take a call on the rate cuts," he added.

Bankers refused to speculate about the extent of the rate cuts, though most seemed to indicate it would be in the region of 25 basis points. If that is indeed the case, the equated monthly instalment (EMI) on a 20-year housing loan would come down by Rs 17 per lakh.

The RBI also directed banks to stop charging a penalty for pre-payment of a floating rate home loan. Sources said most of the large lenders like SBI have already scrapped the charge, allowing customers to switch to a cheaper loan source. If some banks have not, they will have to stop now.

Banks will also issue a unique customer identification code that will help identify a customer, track the facilities used, monitor transactions in various accounts and take a holistic view of a customer profile and smoothen operations for the customer.

Deposit rate parity

The central bank has also frowned on the practice of offering higher deposit rates to corporate customers and high networth individuals. It said banks should have a transparent, board-approved policy on pricing these deposits.

They have been asked to ensure that the variation in interest rates between single term deposits of Rs 15 lakh and above and other term deposits is minimal. Most banks have been offering a percentage point more on the high-value deposits.